U.S. Dollar sells off as markets re-evaluate Trump risk and CAD outlook

President-elect Donald Trump spoke this morning at 11am EST offering very little details on fiscal spending policies.

Investors expected pro-growth messages, but were disappointed with attacks on

  • U.S. intelligence and the compromising information Russia has collected on him
  • Labelling China as a currency manipulator and slapping hefty tariffs on exports
  • Pharmaceutical companies “were getting away with murder”

Unfortunately, there were very little mention on

  • Repatriation of oversea funds by U.S. corporations
  • Infrastructure spending plans
  • Job creation beyond “made in USA”

While it may be early in his presidency, Trump’s comments have warranted greater market volatility with possibilities of hindering global economic trade and growth.

Aside from targeting the pharmaceuticals sector, Trump has called out automakers Ford Motor and Toyota for considering building compact cars for the U.S. market in a Mexico-based plant.

Back in November, 2016, Ford Motor has cited expectations to shift production of smaller cars to Mexico from Michigan. Chief Executive Officer Mark Fields stated by migrating the production of its Ford Focus line to Mexico, it makes room for two important products to be made in the Michigan plant. As an added reassurance, Fields stated that there will be no job impact with this transition. Last Tuesday, Ford Motor scrapped the planned Mexico plant and added 700 jobs in Michigan following Trump’s threat of a “big border tax” over compact cars made in Mexico.

Last Thursday, Trump targeted Toyota Motor Corp, the world’s largest automaker, threatening to impose a hefty fee if it builds its Corolla cars for the U.S. market in Mexico. Toyota’s Guanajuato plant began construction back in November to which it has decided to re-evaluate market risks following Trump’s January 20th inauguration.

Based on current events, Trump is seen to favor a protectionist view in preserving U.S. manufacturing jobs. This poses economic growth and inflation risks as we have observed the U.S. dollar selling off.

screenshot-at-jan-12-00-51-53

Starting off in the new year, the U.S. Dollar Index sold off from a mixture of cutting growth forecasts and profit taking following December’s rate hike. The Commitment of Traders (COT) report did not display any significant changes in non-commercial positions likely due to lower trading activity over the holidays.

screenshot-at-jan-12-00-58-51

Meanwhile, investors flocked to safer Treasury and commodity instruments as yields fell across the board and gold saw a 3.37% increase in the new year and 6.26% since mid-December of last year.

Given the run up of the U.S. Dollar last year due to rate hike expectations and expectations of a Clinton presidency, currency plays I’m looking at involve taking bearish stance especially against heavily shorted pairs notably the Canadian Dollar and Japanese Yen. For the Canadian Dollar, recovery is partially due to upticks in oil prices as OPEC agrees to first supply cuts in 8 years.

cd

Taking a look the Canadian Dollar COT report, non-commercial positions essentially closed out and netted out. However, the spot market indicates another potential sell-off from a breakout squeeze.

screenshot-at-jan-12-01-18-46

Today’s wedge breakout should be discounted for the fact that it was due to Trump’s presidential speech. Nevertheless, it does continue to market further downside pressure ahead.

screenshot-at-jan-12-01-23-29

Over on the monthly time-frame, this pair already tested the 38.2% Fibs level and roughly held up. The next long-term level to be tested would be the 61.8% Fibs retracement which marks a long term price target of 1.15~. Intraday scaled trades shall be planned accordingly.

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